To this end, the banks’ non-interest income is unlikely to help offset earnings as the analyst notes soft market sentiments and weak retail sales in Singapore may imply a downside to wealth and cards fees. Trade and loan-related fees may also be at risk.
Finally, the banks’ asset quality may be affected by weaker growth prospects and a sharp dip in oil prices.
“[The] banks are [a] bellwether of [the] economic outlook [which are] restrictive/high US rates and tariffs increasing recessionary risks,” Tan writes in his April 6 report (US time).
Based on a 7% trailing 12-month (TTM) dividend yield, the analyst likes DBS for its “relatively defensive” book followed by OCBC and UOB. In his base case, Tan has assumed that the banks’ capital management strategies announced during their 4QFY2024 ended Dec 31, 2024, results, remains intact, although he notes that the Monetary Authority of Singapore (MAS) may step in. In 2020, at the height of the Covid-19 pandemic, the central bank set a precedent to cap the banks’ capital management policies in times of uncertainties, Tan writes.
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Based on his estimates, the banks could de-rate by 1% to 26%, depending on the extent of risk-off sentiments and earnings impact. Following the implementation of the global baseline tariffs of 10%, all three banks’ share prices plunged at market open on April 7. Shares in DBS fell to $36.57 from $43.30 while OCBC’s shares fell to $15.185 from $16.62. Shares in UOB fell to $29.93 from $35.46.
The analyst has cut his fee income estimate by 3% to 8% for FY2025 to FY2027 for all three banks and has raised his provisions estimates slightly. This brings his earnings estimates to 4% to 5% behind the consensus for DBS, 2% to 5% for OCBC and 4% to 10% for UOB.
Accordingly, Tan’s target prices for DBS is lowered to $47 from $49.30, while OCBC’s target price is now down to $15.70 from $16.30. UOB’s new target price is at $34.80 from $36.90 before. The analyst has maintained his “buy” call on DBS and “neutral” calls on OCBC and UOB.
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SGX ‘unlikely to offer investors a hiding spot’
The Singapore Exchange (SGX) is “unlikely to offer investors a hiding spot” despite it being a “classic defensive” as uncertainties in the market and volatility increases turnover liquidity.
However, the stock rallied by some 40% before Citi’s downgrade in February and optimism was built into the counter’s P/E valuations.
“Trading volatility could initially be elevated as optimism unwinds, but [SGX’s] securities daily average value (SDAV) could fall should poor market conditions continue,” Tan writes.
“Banks could de-rate (1/3rd of trading value) while sentiments on mid-caps names (beneficiaries of SGX value up) could dent on liquidity concerns; both are headwinds to market trading values,” he adds.
Tan’s target price for SGX is kept at $11.90.
As at 1.04pm, shares in DBS, OCBC and UOB are trading at $38.99, $33.36 and $15.39 while shares in SGX are trading at $11.65.
